) reported adjusted earnings per share of 52 cents in the second
quarter of fiscal 2014 (ended Dec 31, 2013). Adjusted earnings
missed the Zacks Consensus Estimate of 61 cents but were higher
than 50 cents reported in the year-ago quarter.
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GAAP earnings per share in the quarter came in at 30 cents, down
from 52 cents reported in the year-ago quarter.
Kennametal generated revenues of $689.9 million, up 9.0% year
over year and above the Zacks Consensus Estimate of $663.0
million. The year-over-year increase can be attributed to a 2%
hike in organic revenues and a 7% gain from the acquisition of
Tungsten Materials Business (TMB) from ATI in Nov 2013.
Excluding the $44.8 million contribution from the TMB
acquisition, adjusted revenue in the quarter was were $645.1
A brief discussion on the segments of Kennametal is given below:
Industrial segment revenue in the quarter grew 10.0% year over
year and came in at $370.6 million. Organic growth of 6% was
driven by improvements in general engineering, transportation,
energy, aerospace and defense. On a geographical basis, revenues
increased 12% in Asia, 7% in Europe and Americas 2% in the
Infrastructure segment reported a 7.0% year-over-year increase in
revenue to $319.3 million. Organic revenue declined 2% due to
weak results in the earthworks and transportation markets, offset
by strength seen in general engineering and energy. Revenue in
Europe grew 8% while it declined 7% in the Americas and 4% in
On a geographical basis, North America revenue increased 7.9%
year over year to $302.0 million; revenue from Western Europe was
$215.7 million, up 16.9% year over year while revenue from Rest
of the World was about $172.2 million, up 2.0% year over year.
Cost of revenue in the second quarter went up 11.4% year over
year and represented 70.0% of total revenue; up from 68.5% in the
year-ago quarter. Operating expenses, as a percentage of total
revenue, stood at 21.5%, up 130 basis points year over year.
Adjusted operating margin in the quarter was 9.6%.
Exiting fiscal second quarter 2014, cash and cash equivalents of
Kennametal stood at $163.3 million, nearly half of $333.3 million
reported in the previous quarter. Long-term debt and capital
leases stood at $1,035.6 million, substantially up from $703.4
million recorded in the previous quarter.
Kennametal reported $40.2 million net cash flow from operating
activities in the second quarter of fiscal 2014, down from $51.1
million generated in the year-ago quarter. Capital expenditure in
the quarter increased 28.0% year over year to $23.8 million. Free
cash flow was approximately $16.7 million compared with $32.8
million in the year-ago quarter.
Besides the financial result announcement, Kennametal's board of
directors also approved a quarterly cash dividend of 18 cents.
The dividend will be paid on Feb 26, 2014 to shareholders of
record as of Feb 11, 2014.
For fiscal 2014, Kennametal expects total sales growth to be in
the 12%-13% range versus 5%-7% expected earlier. The revised
guidance includes roughly 7%-9% contribution from the TMB
Organic revenue growth is anticipated to be within 2%-4% versus
4%-6% expected earlier. The guidance has been lowered to account
for lower-than-anticipated growth in the oil and gas markets
served by Kennametal and continued weakness in underground mining
in the U.S. and China.
The Industrial segment is projected to exhibit solid growth while
the Infrastructure segment will remain weak due to lower volume
Earnings per share guidance has been lowered to a range of
$2.60-$2.75 from $2.90-$3.05 expected earlier. The TMB
acquisition is likely to dilute earnings by 32-36 cents.
Kennametal anticipates cash flow from operating activities to
range within $280-$310 million versus $330-$380 million expected
earlier. Capital expenditure is predicted to be in the $130-$140
million range (versus $130-$150 million range expected earlier)
while free cash flow is likely to be within $150-$170 million
(versus $200-$230 million range expected earlier).
Kennametal expects to incur integration costs of $40-$50 million
related to the TMB acquisition through fiscal 2016. Also, annual
savings of $35-$45 million are expected to be realized via
consolidation of acquired assets, reduction in administrative
overhead costs and leveraging supply chain.
Kennametal currently has a market capitalization of $3.7 billion
and carries a Zacks Rank #2 (Buy). Other stocks to watch out for
in the industry include
CIRCOR International, Inc.
Flow International Corp.
MRC Global Inc.
). All these companies carry the same Zacks Rank as